How to trade CFDs on forex markets

What are forex CFDs?

Forex CFDs are contracts used to trade currency pairs via leverage. The forex market is known to be highly volatile, so traders often choose to trade this asset class using CFDs – as it enables them to speculate on both rising and falling prices.

All CFDs are traded using leverage, which means you only need to put up a small deposit (called margin) to open a larger position. However, as your total profit or loss is based on the full size of your position, either could significantly outweigh your margin amount. You should always take appropriate risk management steps when trading CFDs.

Forex CFDs: the essentials

Before getting started, there are some key things all traders should know about the forex market and CFDs as a way to trade financial markets. Here are the five essentials to know:

What’s the difference between forex and CFDs?

Forex is one of the many markets you can trade with us. When trading forex, you’re speculating on the value of one currency against another – for example, EUR vs USD. CFDs – short for contracts for difference – is one of the methods you can use to get exposure to forex with us. When trading with a CFD account, you don’t take ownership of physical currencies. Instead, you’ll use the derivative to speculate on price movements.

Forex is traded in pairs and mimics the underlying

Forex is always traded in pairs – for example, the euro and the US dollar (EUR/USD). You’re always buying one currency and selling the other in the pair, based on which currency you think is going to appreciate in value against the other. The currency being bought is known as the base currency (appears on the left), while the other is called the quote currency (appears on the right).

The price of the pair shows how many of the quote currency it’ll cost to buy one of the base. So, if EUR/USD is trading at 1.35000, it means it costs $1.35 to buy €1. Note that CFD forex trading is designed to mimic trading the underlying market relatively closely. Our forex CFD prices are only driven by the movements of the underlying market (with the exception of our weekend FX prices, when most markets are closed, so prices driven by upcoming market events and client sentiment).

Lastly, currencies are traded in lots – batches of currency used to standardise forex trades. These lots tend to be large, to account for the fact that forex price movements are usually small. For example, a standard lot is 100,000 units of the base currency while a micro lot is 1,000 units.

Forex CFDs trade in the quote currency

With us, you’d usually trade FX CFDs on the spot (on the current cash price of that currency pair, as opposed to the future price) and you’d always trade in the quote currency. For example, when trading EUR/USD, you’ll trade in US dollars.

In forex, you can trade major pairs like the EUR/USD or GBP/USD or minor pairs like the GBP/CAD and even exotic pairs like the EUR/MXN.